Running a business involves a lot more than knowing about your industry. If you want to be a successful business owner, you’ll need to educate yourself about potential legal issues that could arise and how to avoid ending up in a lengthy and expensive courtroom battle. Here are the top legal issues every business owner should know.
1. Mixing Business with Personal Bank Accounts
While the whole “business and pleasure” idea sounds great, it’s a legal nightmare. Having an “LLC” or “Inc” protects you from being sued personally, as most claims cannot be filed against the business owner personally and must be filed against the business entity. However, if you use a business bank account for personal use, you open yourself up to legal liability. Withdrawing cash from the business account or using corporate funds for personal expenses, even once or twice, can open a window for you to become personally liable for something for which the company would normally be liable.
2. Wrongful termination lawsuits
It’s very important to be familiar with your state’s labor laws regarding termination. Some states have “At Will Employment” laws that allow you fire employees without having to establish “just cause,” but you still have to be careful not to violate any discrimination laws. While companies in “at will” states will not have to prove the employee had poor performance to justify termination, you’ll want to be able to show that no form of discrimination based on race, age, gender, etc. influenced your decision to terminate the employee.
For businesses that do not reside in states with “at will employment,” you will need to be able to prove that the employee was not performing their duties. If you choose to let an employee go for poor performance, it’s very important to have the employee sign final termination forms that have been reviewed by an attorney. The forms should make the terms and reasons for dismissal perfectly clear so that the employee cannot slap you with a wrongful termination lawsuit.
3. Insurance coverage
All companies should at the very least have general liability insurance, but business owners should consider options for insurance more specific to their industry as well. Policies like product liability insurance, worker’s compensation insurance and car insurance could very well be necessities for your company. Each year, you should sit down with your insurance company and attorney to be sure that your policy coverage is commensurate with your business volume. If you company grows, your insurance policy needs to grow with it. All too often businesses forget to update their insurance policies and when it comes time to file a claim, their coverage is no longer enough to cover how much the business has grown.
4. Labor Law Issues
Smaller businesses tend to forget that federal labor laws can affect them as well, but owners of businesses large and small need to be aware of labor laws, especially the Fair Labor Standards Act (FLSA), The Family and Medical Leave Act (FMLA), and the National Labor Relations Act (NLRA).
The Fair Labor Standards Act allows employees to recover any unpaid overtime, plus attorney’s fees. That means that if they can prove that you owe them even $50 in overtime, you could end up shelling out quite a bit to pay for their lawyer. Make sure you keep meticulous records of overtime and pay it out with regular paychecks.
The FLSA can also affect the way the federal government views independent contractors. The IRS looks at things such as financial factors, type of relationship, and behavioral factors to determine if independent contractors are more like employees that are being purposely misclassified as contractors so that the company can avoid paying overtime. If the government rules that your business has been attempting to skirt overtime pay by misclassifying workers, you are in for quite a legal headache.
If your business has 50 or more employees, the Family and Medical Leave Act will apply. This act requires companies to grant eligible employees up to 12 weeks of unpaid, job-protected leave for certain medical or family issues. That’s 12 weeks out of every 12 months that eligible workers are legally allowed to take time off without risking losing their job. If you deny an eligible worker the 12 weeks or permanently replace them during their absence, you are in violation of the FMLA.
Many businesses believe that the National Labor Relations Act does not apply to them because this act deals with unionized workers. However, even if your business does not employ union workers, the NLRA still grants employees the right to unionize and/or bargain as a group for things such as wages and terms of employment. Denying employees these rights, even if they are not part of a union, is grounds for a lawsuit.
While these are certainly some of the top legal issues all business owners should be aware of, it’s far from a comprehensive list. Protect yourself by hiring an attorney, a good human resources team, a great accountant, and educating yourself about all labor laws.